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IMF Demands More Spain Reforms to Keep ‘Impressive’ Recovery

(Bloomberg) -- Spain must make further efforts to reduce long-term unemployment and continue its budgetary adjustment process, the International Monetary Fund said, while noting that the nation’s economic recovery remains robust.

In its concluding statement after its assessment of the country’s economic performance, the Washington-based institution said Spain witnessed an “impressive recovery” helped by reforms, fiscal loosening and the European Central Bank’s unprecedented monetary stimulus. Despite the optimistic tone, it warned that vulnerabilities stemming from long-term unemployment, elevated public debt and low productivity remain.

“It is critical to reduce the remaining vulnerabilities and structural weaknesses,” the IMF said in a statement published Tuesday. “Preserving the reform achievements is therefore of utmost importance but Spain needs to go further if it is to sustain the dynamic economic performance.”

The report comes as the government of Prime Minister Mariano Rajoy moves to approve a budget for next year that can reduce the nation’s deficit while opposition groups reject further cuts in a highly fragmented parliament that would require a cross-party agreement. The IMF noted that carefully designed adjustment could be both growth- and job-friendly, while pointing out that there is scope to increase environmental duties and reduce loopholes in the tax system that can prop up revenue. On the expenditure side, the IMF sees room for more efficient reviews of how funds are spent in areas such as healthcare and education.

Budget Goal

Serial deficit offender Rajoy is seeking to meet his budget reduction goal for the first time since arriving in office in 2011 after narrowly escaping a fine from the European Commission last year. The government is planning on raising close to 5 billion euros ($5.3 billion) from companies and by hiking taxes on items including alcohol and tobacco. While the government insists that will be enough to meet its deficit reduction goal for 2016, further adjustments may be needed next year.

“We’re not necessarily calling for more austerity,” said Andrea Schaechter, head of the IMF mission for Spain in a press conference in Madrid after the report was released. “We see most of the adjustment room coming from the revenue side,” she said. “For example by broadening the tax base, looking again at the number of exemptions, looking at those areas of VAT that are currently on a reduced tax regime.”

Adding to its recommendations, the IMF said both long-term and youth unemployment continue to be a drag on growth and productivity, noting that almost 60 percent of those Spaniards without a job have been out of work for more than a year. Though unemployment has fallen rapidly over the past years, it remains the second highest in the EU.

To tackle the problem, the IMF called for “urgent improvement” in the coordination of labor active policies between the central government and regions, while noting that the duality of the labor market -- which segregates workers by contract type often discriminating temporary workers in favor of permanent staff -- could be improved by making permanent hiring more attractive. That could be achieved by providing more legal flexibility for firms over work terms and removing administrative hurdles over dismissals.

On the financial sector front, the institution noted that Spain’s swift action to deal with its banking-sector problems at an early stage mean the system is close to putting its legacy issues behind. The IMF, however, sees scope to improving efficiency in the banking sector, possibly through mergers, increasing highly quality capital and facilitating sufficient credit provisions as demand picks up with Spanish consumers continue to sustain the recovery.